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The Experience Curve Effects were
first described by BCG consultant Bruce Henderson
in 1960. Henderson found that there is a consistent relationship between
the cost of production and the cumulative production quantity.
Simply put it states that the more
often a task is performed, the lower will be the cost of performing it.
Each time cumulative volume doubles, value added costs (including
administration, marketing, distribution, and manufacturing) fall by a
constant and predictable percentage.
Researchers since then have observed
experience curve effects for various industries ranging between 10 to 30
percent.
The Experience Curve is a major
enabler for a cost leadership strategy. If a company can grasp a big
market share quickly in a new market, it has a competitive cost
advantage because it can produce products cheaper than its competitors.
Provided the cost savings are passed on to the buyers as price
decreases (rather than kept as profit margin increases), this advantage is
sustainable. If a business could accelerate its production experience by
increasing its market share, it could gain a cost advantage in its
industry that would be hard to match.
The result is many companies try to gain a large market share quickly by
investing heavily and aggressively pricing their products or services in
new markets. The investment can be recovered later, once the company has
become a market leader and has built itself a
cash cow.
Some limitations of an experience
curve-based strategy include:
- There are also other business
strategies than Cost Leadership Strategies (see
Competitive
Advantage and Value
Disciplines).
- Competitors may also pursue a similar
strategy, increasing the necessary investment levels while decreasing
the returns for both.
- Competitors that copy manufacturing
methods may achieve even lower production costs by not having to recover
R&D investments.
- Technology breakthroughs may enable
even bigger experience curve effects. This is beneficial for later
entrants.
Compare with Experience Curve Effects: BCG
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